Sticky wages, labor demand elasticity and rational unemployment

Chen, Siyan and Desiderio, Saul (2014): Sticky wages, labor demand elasticity and rational unemployment.

Abstract

In this paper we give a clear-cut explanation to the sluggish wage adjustments which are commonly experienced also in face of involuntary unemployment. We prove that unemployment may be the physiological outcome of rational decisions by competing workers who may find it optimal to ask higher wages than the full-employment ones. The key element driving the result is the slope (or elasticity) of labor demand schedule: in case of rigid labor demand, in fact, workers’ wage requests are kept high because of reduced unemployment opportunity costs. This contrasts with other approaches to the analysis of unemployment, where only the level of labor demand is considered. Impatience of working and effort required by the job are also showed to influence the degree of wage stickiness.

• Item Type: MPRA Paper
• Language: English
• Keywords: Sticky wages, involuntary unemployment, labor demand elasticity, game theory
• Subjects: C - Mathematical and Quantitative Methods > C7 - Game Theory and Bargaining Theory > C72 - Noncooperative Games; E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E24 - Employment ; Unemployment ; Wages ; Intergenerational Income Distribution ; Aggregate Human Capital ; Aggregate Labor Productivity; J - Labor and Demographic Economics > J2 - Demand and Supply of Labor > J23 - Labor Demand; J - Labor and Demographic Economics > J6 - Mobility, Unemployment, Vacancies, and Immigrant Workers > J64 - Unemployment: Models, Duration, Incidence, and Job Search

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